Should I Franchise My Business?

Date

Mar 11, 2013

McDonald's

McDonald's continues to be recognized as a premier franchising company around the world. Over 75% of restaurants worldwide are owned and operated by McDonald's Franchisees.

Have a better mousetrap and scared to death that the world
actually is beating a path to your door? People walking through
your operation with notepads and cameras? Trouble sleeping at night
wondering who will knock off your operation first? Certain that
yours is the next Ray Kroc story, if only you could get the
capital? Thinking, "I have a better franchise concept than that
company."?

Maybe you, too, should consider franchising.

WHY FRANCHISE?

In general, companies franchise for one of three
reasons: time, people, or money.

The primary barrier to expansion faced by today's businessman is
capital. And franchising allows companies to expand without the
risk of debt or the cost of equity. Since the franchisee provides
the initial investment at the unit level, franchising allows for
expansion with minimal capital. Moreover, since it is the
franchisee, and not the franchisor, who signs leases and commits to
various service contracts, franchising also allows for expansion
with virtually no contingent liability, thus greatly reducing the
risk to the franchisor.

Another barrier to expansion facing many of today's businessmen is
finding and retaining good unit managers. All too often, a business
owner spends months looking for and training a new manager only to
see that manager leave -- or worse yet, hired away by a
competitor.

Franchising allows the business owner to overcome many of these
problems by substituting a motivated franchisee for the unit
manager. Interestingly enough, since the franchisee has both an
investment in the unit and a stake in the profits, unit performance
will often improve. And since a franchisor's income is based on the
franchisee's gross sales, and not profitability, monitoring unit
level expenses becomes significantly less cumbersome.

Finally, opening a unit takes time. Hunt for sites. Negotiate
leases. Arrange for design and build-out. Secure financing. Hire
and train staff. Purchase equipment and inventory. The end result
is that the number of units you can open in any given period of
time is limited.

For companies with too little time (or too little staff),
franchising is often the fastest way to grow. That's because it is
the franchisee that performs most of these tasks. The franchisor
provides the guidance, of course, and the franchisee does the
legwork. Thus, franchising not only allows the franchisor financial
leverage, but it allows him to leverage his resources as well.

BUT IS MY BUSINESS "FRANCHISABLE?"

Franchising is a relatively flexible format, and just about any
type of business can be franchised, provided it meets some basic
characteristics:

It needs to be credible. Does it have experienced management? A
track-record over time? Is the concept proven? Has it achieved good
local press or public acclaim?

It needs to be unique. Is it adequately differentiated from
competitors? Is it marketable as a business opportunity? Does it
have a sustainable competitive advantage?

It needs to be teachable. Are the systems in place? Are
operating procedures documented? Could someone learn to operate the
business in three months or less?

And it needs to provide an adequate return. Not just
profitability. If a business cannot generate a 15% - 20% return on
investment after deducting a royalty (typically between 4% and 8%),
it is going to have difficulty keeping franchisees happy.

If your business meets these criteria, then it may be a good
candidate for franchising.

THE PROCESS OF FRANCHISING

When a company makes a decision to franchise, it must first develop
a sound plan for expansion. The plan must take into consideration
the numerous issues confronting a new franchisor: speed of growth,
territorial development, support services, staffing, and fee
structure, to name several of the most important. Larger companies
need to address more complex issues such as channel conflict,
anti-trust, and resource allocation issues. And obviously, this
entire plan needs to be subjected to rigorous financial analysis
and scrutiny to fine-tune the strategy for growth.

Once this plan is in place, the franchisor needs the proper legal
documentation. At a minimum, the franchisor will need a franchise contract, a franchise disclosure document
(as required under FTC Rule 436), and, depending on where
franchises are being sold, state registrations. There are literally
hundreds of different business issues that must be addressed in a
good franchise
agreement, and the decisions made regarding these issues will
ultimately dictate the franchisor's success.

Quality control for a new franchisor involves the development of
highly developed systems. Generally, this translates into the
development of an operations manual. This manual must contain not
only the systems used by the business, but also the checklists,
policies, procedures, and tactics that will allow these systems to
be uniformly enforced. Moreover, these manuals must be careful to
avoid the creation of an agency and must also address issues that
could create claims of negligence if the franchisor is to maintain
an effective shield from consumer liability.

Finally, the new franchisor must develop the ability to market and
sell franchises. That requires knowledge of how to attract the
prospective buyer and the necessary materials (brochures,
mini-brochures, videotapes, etc.) that will help make the sale.
Moreover, since the franchise sales process is
highly regulated, the franchisor needs to be educated in proper
sales, disclosure, and compliance techniques.

Every new franchisor quickly learns that when they turned to
franchising they entered a completely different business.
Regardless of how the franchisee makes money, the franchisor has
two roles in life: selling franchises and servicing franchisees.
And of the two, ensuring the success of the franchisee is the most
important.

Properly structured, franchising can allow small companies to more
effectively compete with much larger competitors. It can also allow
large companies to gain the advantages of highly motivated unit
management while reducing overhead. As such, franchising is an
option that more and more companies should explore.

The key to success in franchising is successful franchisees.
Without successful franchisees, no franchise system will last. But
if you can put the interests of your franchisee first, those same
franchisees might help you become the next McDonald's.